Westwood Insights

Market Insight: U.S./China Trade War

While we don’t think it is having an impact on companies’ fundamentals yet, the daily noise in the press is impacting market sentiment.

Patricia Perez-Coutts, Senior Vice President of Westwood International Advisors, feels that “in the end, this will all be a much softer impact.” Although, some stocks may have negatively reacted for another reason — many investors are beginning to doubt the growth cycle, which is supposed to begin in the second half of 2018.

Patricia Perez-Coutts

Patricia Perez-Coutts, CFA
Senior Vice President
Portfolio Manager

 

What is your opinion about the future developments of a trade war?

The Trump administration responded to China’s intention to implement reciprocal tariffs on U.S. exports with threats to impose 10 percent tariffs on an additional $200 billion of Chinese imports. The section 301 investigation determined U.S. damages of $50 billion annually from China’s unfair acts, policies and practices; therefore, the latest threats are somewhat proportional to the perceived injuries from China’s trade policies. The U.S. is currently slated to impose tariffs of 25 percent on $34 billion of Chinese exports beginning on July 6.

The remaining $16 billion of the original product list will undergo further review in a public notice and comment process, the timing of which is set to be released in the coming weeks. Should tariffs on another $200 billion of goods be considered, they would be subject to the same process, which would ostensibly take two to three months. Thus, we see little prospects for a near-term settlement. That said, we expect, and hope, that calmer heads ultimately prevail before protectionist threats turn into aggressive action and business confidence crumbles.

 

What is the impact on the equity market if the bull-bear and base case happens?

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Base Case
We believe the trade conflict with China will be settled before it progresses significantly beyond the initial imposition of tariffs on $50 billion of imports in both directions.

 

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Bull Case
No trade war will form, and equity markets will recover from current short-term pull back.

 


Bear Case
Our analysis indicates that augmenting the trade dispute to include a total of $200 billion of imports could reduce real GDP growth by roughly -0.2 to -0.3 percentage points. In addition, the effective $32.5 billion “tax” on imported goods could have the effect of boosting core inflation by roughly 0.15 percentage points. A trade war would have a limited impact on Chinese economic growth, as China’s exported goods and services represent 19.6% of total GDP, and only 22% of exports are destined for North America. As a result, equity markets could experience further weakness. If things progress, we think that the stock market correction could get into the -5 percent to -10 percent range. If a settlement is then negotiated quickly, the stock market could recover and the risks to GDP mitigated. However, if a trade war gathers further momentum, it could well induce the next recession.

 

Learn more about our approach to Global & Emerging Markets investing.

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